Is this another dip to buy?

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
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TheTechTrader.com with Harry Boxer.

While we saw the volatility I expected last week, the question everyone is now asking is if it is time to buy the dip for a run to new highs. I have to say, such a buy has become exceptionally risky at this time.

It seems that the breakout over 1850 on the June E-mini S&P 500 futures has not held its ground. Rather, this week, we saw the market come back down under the breakout level and potentially signaling we have experienced a failed breakout.

Last week, I noted that if the market was unable to maintain support at the 1859ES level (formerly the 1866ES level on the March contract), it then opens the door to further declines, as it made it a high probability that a 5 wave structure was in place at the prior all-time high. So, now, the big question is if that is going to be a lasting high, which will now stand for an extended period of time as the market heads into a correction, or if we are set up to hit higher highs in the near term.

At this time, I have one pattern possibility which can still take us to higher highs later this month or into early April. However, that pattern is an expanding-ending diagonal, and is represented in the purple count on my 60-minute chart. But that pattern is an exceptionally rare pattern, and the probabilities reside with the fact that the high is now in place, and we will enter into a more protracted correction. Any breakdown below 1825ES would invalidate the potential for this pattern to play out.

After the market completes a 5 wave pattern, the question we always try to answer is if the market begins a new 5 wave structure in the opposite direction, which makes a clear statement for a change of trend. At this time, we do not have a completed 5 wave structure, but the potential clearly exists on the chart. The red count on the 60-minute chart represents the 5 wave decline potential, which could take the market below the 1800ES level over the next week or two.

Within this impulsive red pattern, the market will have just about completed a wave (4) within red wave iii of a 3rd wave down. This means that as long as the .764 extension at 1846ES is maintained as resistance, pressure will remain to the downside. The immediate next target region for wave (5) of iii would be the 1818-22ES region.

Assuming the market does drop down toward that region next, then I would expect a wave iv bounce, which should not exceed the 1840ES region. Any move through the 1840ES region from that lower level would be a strong indication that we will not complete a 5 wave decline off the highs. Rather, it would signal that the market will be correcting in 3 wave moves, which will make trading much more complicated.

Alternatively, if the market should immediately move through the 1846/50ES region from where it closed on Friday, or if it will drop to the 1820ES region and then move through the 1840ES region next week, we will classify that low as an a-wave, and the ensuing rally through 1846ES region as a b-wave, which is confirmed on a move through the .618 extension at 1850ES. And depending upon where the market should find support for such an a-wave, we will then set our targets during the week for the b-wave rally, which should set up the next decline phase for this larger-degree correction.

Until we see a break down below 1825ES, I cannot be more confident that a new high will not be seen. But as long as the market maintains below 1850ES at all times, we can see the market subdivide in 4th and 5th waves all the way down to just below the 1800ES region over the next week or two. Any move over the 1850ES level over the next week will be viewed as a potential b-wave rally setting up a c-wave decline to the low 1800ES region, as long as we maintain below 1870ES. A move over 1870ES would make me consider the expanding-ending diagonal more seriously, which can still take the market just over the 1900ES region before topping.

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